Proposing a candidate for best forex indicator combination by marrying an exponential moving average with Bollinger bands…
New traders are often drawn to the idea of plotting indicators on their charts to help them understand which way price is trending.
The Bladerunner is a good example of a forex price action strategy with the addition of one simple indicator: the 20 Exponential Moving Average (EMA). In recent times, I have experimented using either the 20 EMA and/or the Bollinger mid-band in this strategy. The Forex Polarity Indicator grew out of this.
In a sharply trending market it is easy to see which way price is heading. But when price is more or less in a range over an extended period of time, any trending indicator tends to give a lot of false signals.
Beginners should generally avoid trading in these conditions. But if you must trade at times like this, the Forex Polarity Indicator is probably a good choice for determining trend.
The polarity indicator is a straightforward affair. It’s based on the 20 Exponential Moving Average combined with the standard 20 Bollinger mid-band. Many traders keep their eye on both of these, even in the big trading houses where price is often influenced. So if you are going to pick an indicator to trade, it’s a good idea to go with the strength of these traders.
I started plotting both of these indicators on my charts in an effort to find out which one was the more reliable when it came to determining trend and predicting trend changes. After months of experimentation I came to the conclusion that neither was superior to the other. Both had occasions when they got it right, and got it wrong.
But the main thing was that the area around these two indicators seemed to represent a zone where price would often react. If price was below this zone it would often reject to the short side after entering it. If price was above this zone it would often come back down, tentatively retest the area bounded by the two indicators, and then bounce away to the upside again.
N.B. Click to view the following charts…
So I started plotting the two together on my charts and I found using a retest of either indicator – rather than one or the other – seemed to give a more reliable indication over the longer term.
The thumbnail at left shows one of my charts with the 20 Ema and the Bollinger mid-band plotted on it. Click on the thumbnail or otherwise enlarge to view in more detail.
The only problem was, I found the two lines of the Bollinger mid-band and the 20 Ema together with the outer bands of the Bollinger – which weren’t needed or used in this strategy – seemed to clutter the chart. I therefore had an indicator coded for me to plot the zone bounded by the two indicators.
You can see the result at the right, where the yellow area represents the zone contained within the 20 Ema and the Bollinger mid-band.
I have also left the 20 Ema and Bollinger bands plotted on this chart to show how the two moving averages (remembering that the Bollinger mid-band itself is a moving average of sorts) form the outer boundaries of the polarity indicator.
If we then remove the two old indicators we are left with the simple forex polarity indicator, as plotted in the thumbnail at left.
I think those looking for a good trend indicator and/or MT4 price action indicator, will enjoy using the Polarity Indicator.
The Polarity Indicator comes with both settings at the standard 20. You can play around with these if you like, perhaps different settings will give better results on different time frames and currencies etc.
Take Care & Trade Well!